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Inflation is ‘guaranteed’ to fall, insists Bank of England

Bank of England's Andrew Bailey tells MPs that while he expects inflation to fall sharply this year. Photo: Yui Mok/Pool via Reuters
Bank of England's Andrew Bailey tells MPs that while he expects inflation to fall sharply this year. Photo: Yui Mok/Pool via Reuters (POOL, REUTERS)

Inflation is almost “guaranteed” to come down rapidly this year unless there is a new, unexpected global event, according to the Bank of England.

The governor of the Bank of England has told MPs that its forecasts for inflation to more than halve this year are at risk from price and wage-setting as unions continue to demand large public sector settlements.

Bailey told the Treasury Select Committee on Wednesday there are "powerful downward forces" on inflation this year, but said the BoE has still raised interest rates because of concerns that price rises may persist.

“We have got the largest upside skew on our forecasts that we have ever had on inflation… so we do put wait on the persistence rise this year but there are very powerful downward forces this year all things equal,” Bailey said.

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The Bank is forecasting that the consumer price index (CPI) will fall to about 4% by the end of the year – from its current level of 10.5% – but that is based on a lack of additional shocks for the UK and wider global economy.

Read more: Bank of England raises interest rates to 14-year high of 4%

Silvana Tenreyo, an external member of the Bank’s nine-person Monetary Policy Committee (MPC), stressed that declining inflation is all but guaranteed.

She told MPs: “Unless there is another big development that we do not or cannot know about, such as a new energy shock, I think a fall in inflation is pretty much guaranteed.

“We have tightened policy significantly over the past year and that’s going to have a large impact on demand, and will be the mechanism that brings inflation down to below target.”

However, she warned that just a fifth of rate rises have fed through to the economy. "To have deflation in services requires a massive recession," Tenreyro said.

The Bank of England (BoE) has raised the UK interest rates by 0.5% to 4%, the highest since the financial crisis of 2008.

This is the 10th time in a row that the central bank has increased rates as it tackles record high inflation, making borrowing costs higher despite the risk of a looming recession.

The Monetary Policy Committee voted by a majority of 7–2 to increase Bank Rate by 0.5 percentage points, to 4%.

Andrew Bailey has said that despite expectations that inflation has peaked, the Bank of England has still raised interest rates because of concerns that price rises may persist.

"We are concerned about persistence [of inflation] and that's why, frankly, we raised interest rates this time," he told the Treasury select committee.

"I am very uncertain, particularly about price-setting and wage-setting in this country. We have got the largest upside skew in our forecasts that we have ever had on inflation."

Bank of England rate-setters struck opposite notes on the risks posed by an inflation rate that hit a 41-year high of 11.1% in October before falling to 10.5% in December, still more than five times the BoE's 2% target.

Read more: UK house prices and sales continue to fall as interest rates rise

Jonathan Haskel, an external MPC member, told MPs that he remained ready to "act forcefully" against persistent inflation - keeping a phrase that was dropped by the majority of his colleagues last week.

At the other end of the MPC's debate, Silvana Tenreyro said interest rates were already too high.

"Where things stand right now, I would see myself considering a cut. I don't want to talk about the particular meeting," Tenreyro said.

Watch: BoE governor sees 'signs that we’re beginning to turn corner’

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